Private Equity Double Standard: California’s John Chiang, Other State Officials Happily Ding Headline-Grabbing Wells But Look Other Way With PE

As the old saying goes, a politician is someone who gets in front of a mob and calls it a parade.

A lot of pent-up frustration over the failure to do anything serious about pervasive bank misconduct has blown up with Wells Fargo in its settlement involving over 2 million fake customer accounts. The sheer scale of the activity, and the fact that for over 500,000 of bogus credit card accounts, it sometimes also involved purloining funds from deposits to cover fees, has led not just to a firestorm of criticism from Congressmen of both parties, but has also led state treasures to suspend their business with the miscreant bank. California’s John Chiang was first out of the box, saying he’d use other banks for a year and was quickly followed by Illinois’ Michael Frerichs, who announced a open-ended freeze.

But as Gretchen Morgenson pointed out in the New York Times, private equity firms have been required to pay much more in restitution to investors than Wells Fargo has or expects to pay. Wells Fargo has doled out $2.4 million in purloined monies; its settlement with the CFPB, OCC, and Los Angeles City Attorney called for it to set aside a total of $5 million for this purpose.

Needless to say, that’s much smaller than the pilferage that the SEC identified in recent settlements, such as $40.3 million for Apollo, $29 million for Blackstone, and $18.7 million for KKR.

Morgenson focused on Apollo and identified 13 public pension fund investors who’d put at least $100 million Apollo VII funds that the SEC said had been fleeced in its order (CalPERS, on whose board Chiang sits, has $800 million committed to Apollo VII). She confirms the pattern we’ve seen again and again: these fiduciaries, who by law are required to put the interest of their beneficiaries first, make it clear that making nice with private equity firms is actually far more important to them.

From her story:

In an email to Mr. Chiang’s office, I asked whether he’d put Apollo into the penalty box as he’s done with Wells Fargo. No response. O.K. What about the other public pension fund officials who invest with Apollo?….

Some funds didn’t respond; one declined to comment. And some said they had responded to the S.E.C. case by increasing their demands for fee transparency from Apollo and other investment managers. That’s not enough to move the accountability needle.

Others like Calpers and the California State Teachers’ Retirement System told me they were monitoring the Apollo situation. Fine, but isn’t that their job?

Matthew Sweeney, a spokesman for the New York State comptroller and overseer of the Common Retirement Fund, seemed to indicate that assessing an investment firm’s potential return took a higher priority than weighing a manager’s integrity.

“The fund will continue to review all investment opportunities based on their ability to meet its standards of risk and return,” he said in a statement. Apollo says that the VII fund has had strong returns since its inception in 2008.

In response to my questions, other pension officials said that some ethical flaws were to be expected or that Apollo had been transparent about its fees. “Given the size and breadth of our portfolio and our investment manager network, it is likely that there will be occasional lapses,” Dennis D. MacKee, spokesman for the Florida Board of Administration, said in a statement. “To the extent these occur, the forthrightness with which they are addressed, both to remedy any damage done and prevent recurrence, is what we focus on,” he said.

The view these fiduciaries took on Apollo’s breach could not be clearer: There’s nothing here. Move along.

This is simply a continuation of the sort of shirking of duty we’ve called out repeatedly. For instance, a group of state treasurers plus the New York State and City comptrollers called for the SEC to deliver them more private equity transparency…something they were perfectly able to advance on their own. From a July 2015 post:

If you didn’t know better, and the tacit assumption is that the dumb chump public does in fact not know better, you might easily think a letter by state officials to SEC chairman Mary Jo White amounted to meaningful action. Here’s the overview from the Wall Street Journal…:

A group of states and cities said it intends to send a letter to the Securities and Exchange Commission late Tuesday asking for greater transparency and more frequent disclosures by private-equity funds…

This is patently ridiculous.

The SEC does not have the authority to order more frequent fee and expense disclosures. The information that the investors receive now is what they have obtained in their negotiations at the time they invest. They can calculate management fees from one of the documents they sign, the subscription agreement; they should be able to derive the so-called carry fees from annual audited fund financial statements. Those audited financial statements also contain fund-level expense information.

These limited partners have chosen, for decades, to give private equity general partners a blank check by allowing them to use the portfolio companies purchased with the limited partners’ monies as piggy banks, with virtually no checks or oversight. Critically, the limited partners have no right to see the financial statements of the portfolio companies, nor do they get information about transactions or business arrangements between the portfolio companies and parties related to the general partner and its owners, employees, and affiliates…

The elected officials who are asking the SEC to intervene on their behalf are all board members or trustees of pension funds that have agreed to sign remarkably one-sided agreements with private equity general partners. So why, pray tell, have they sat pat and allowed this sort of thing to go on?

Admittedly, later that year, Chiang did rouse himself to say he’d sponsor a bill that would provide transparency for all private equity fees charged to California funds. As we discussed, the resulting bill, AB 2833, was quickly watered down and can readily be circumvented. An easy proof that the bill won’t inconvenience the secretive private equity industry? It didn’t get a single opposing vote in either house of the California legislature.

So while it is good to see state officials get on the Wells Fargo bandwagon, bear in mind they’ve done so only after the bank become a safe target. By contrast, they’ve sat on their hands as far as private equity is concerned, when they have an actual duty, as opposed to garnering headlines, at stake.